New Times,
New Thinking.

  1. Election 2024
13 June 2012updated 05 Oct 2023 8:02am

Too many politicians have lost faith in the state’s capacity to manage or innovate

By Hettie O'Brien

In 1919, Viennese economist Otto Neurath wrote a pamphlet entitled War Economy. During the First World War the state assumed the role of economic planner, mobilising industry to serve military and civilian needs. Economists “often denied the possibility that war could enrich a people”, Neurath observed, but the results of the First World War appeared to disprove this: with the state acting as manager, the economy became a vehicle for securing common goals. During peacetime, Neurath asked, “could the same, or even a better result” be achieved? Could a state-planned economy be more effective than its free market counterparts?

Neurath’s theory was swiftly denounced by libertarian economists. Ludwig von Mises and Friedrich von Hayek both argued that free markets act as signalling devices, providing information about consumer choices and preferences in real time through the rise and fall of prices. State planners, by contrast, could never access the volumes of information required to gauge the demands of a population.

Yet Neurath’s theory was vindicated by events. The US New Deal of the 1930s showed that state planning, rather than cutthroat competition, could stimulate economic recovery. The UK’s GDP rose by 27 per cent from 1938-43 as a result of economic planning during the Second World War. But Mises’ ideas endured. As the post-war Keynesian consensus collapsed in the late 1970s, heralding the birth of neoliberalism, politicians retreated from planning and embraced free markets. Today, the concept of state planning evokes memories of the USSR where consumers were condemned to drive Lada cars and fetishise Western consumer choice from behind the Iron Curtain.

But this doesn’t mean that planning has ceased. The truth is that planning works, just not for us. This is the argument that Leigh Phillips and Michal Rozworski advance in their new book The People’s Republic of Walmart, using the retail behemoth as an emblem. “If Walmart were a country… its economy would be roughly the size of a Sweden or a Switzerland”, they write. The US company stocks products in more than 70 countries and operates 11,000 stores in 27 nations. Its annual revenues are similar in magnitude to around 60 per cent of the USSR’s entire GDP in 1970. Its different departments, suppliers, stores and delivery vans do not compete against each other. In fact, everything at Walmart is planned.

As the US economist J.W. Mason has written, were economists to acknowledge the role that planning plays in free market economies, “it would undermine the idea of markets as natural and spontaneous and demonstrate the possibility of conscious planning toward other ends”. The existence of private companies has long been a rebuke to free marketeers, exposing the flaw of the argument that markets could ever be perfectly competitive. If they were, firms – those islands of cooperation where individuals enter into collaborative partnerships with one another – wouldn’t exist.

The idea that companies like Walmart could be advantageous to socialism is rooted in the argument that a socialist economy could be built by turning the tools of capitalism towards different ends. Phillips and Rozworski concede an admiration for Walmart akin to an epidemiologist appraising the genius of a drug-resistant strain of tuberculosis. Could the company – an exemplar of capitalist planning – be turned into something altogether more radical?

The People’s Republic of Walmart is a timely provocation. In the age of big data, challenging orthodoxies about planning is more necessary than ever. Hayek believed the market was the best form of decentralised decision-making, with prices acting as a “system of telecommunications”. What he didn’t foresee were the huge amounts of economic activity that now take place outside of the competitive marketplace, without money changing hands, or how big data would enable what he thought only the market was capable of.

“Today, we have telecommunications far more precise and powerful that can communicate information directly without it being mediated by prices”, Phillips and Rozworski write. Companies such as Google and Amazon capture information through users’ digital footprints rather than prices – indeed, these companies offer goods at subsidised rates (Amazon Prime) or even for free (Google Mail). Hayek couldn’t predict how data would become the signalling device of the digital economy, or how a firm such as Amazon could become an entire marketplace.

Could Amazon be turned into something different? The authors enter more challenging terrain when they advance from theory to practice. That companies now draw on intimate knowledge of individuals’ behaviour, rather than merely price indicators, is a worrying development. Amazon has replaced the planned economy that Hayek feared with a panoptic economy that is no less powerful. The authors ask: “Can we leap over a dichotomy of surveillance capitalism versus surveillance communism?” A better question might be: in an idealised economy, would we even want to replicate the dynamics of a firm like Amazon – let alone with a version owned by the state?

In presenting the case for turning corporate behemoths into different beasts, Philipps and Rozworski elide the unique dynamics that distinguish private firms from state-owned enterprises. During the 1940s-60s, Fordist production led companies to manufacture standardised products with little variation. This made for diminished choice; as Henry Ford once quipped of his T2 model, “you can have it in any colour you like as long as it’s black”.

But as post-war Fordism came to an end, Western consumer markets reached saturation point and began to stagnate as people’s’ basic needs were met. In response, companies started to cast around for new ways to generate consumer revenue. Product differentiation was born and firms started manufacturing goods in multiple shapes, sizes and colours, inventing inbuilt obsolescence and customisation to secure a faithful stream of consumers.

Put simply, firms were no longer reacting to consumer demands: they were creating them. This reality led economists Joseph Monsen and Anthony Downs to question why people would “buy private goods and services they do not relatively need or want”. Their answer was that a new consumer class craved distinction and individuality – desires that were created in part through corporations’ stealthy marketing campaigns.

In contrast to the plentiful array of consumer choice available in the post-Fordist economy, “government goods” produced by the public sector were “designed with an eye to uniformity”, Monsen and Downs wrote. Their observations were reflected in the disparity between the US, where one was confronted by a bewildering array of differentiated products and brands (often produced by just a few corporations), and the USSR, where government goods were often monochrome and standardised.

Could Walmart be turned towards post-capitalist ends when its size is partly based on creating consumer desires? The authors counter that a democratic economy would be one in which people collectively decide the goods they want to produce and how these good are distributed. In a socialist economy, one might hypothetically be able to purchase lavender soap – but only if society had first decided that lavender soap had a use value distinct from its scentless counterpart.

Phillips and Rozworski admit that they don’t have all the answers – but counter that “we all need to start thinking about what [they] might be.” Rather than offer concrete solutions, their book challenges an economic orthodoxy that has too often denied the existence of planning in the private sector. Their comparison of public and private healthcare is perhaps the most illuminating. In 2014, the UK spent just over 9 per cent of GDP on healthcare – below average for countries in the global north, and far less than the 17 per cent spent on healthcare in the US. The National Health Service, which gave the British state an effective monopoly over public health provision, is a reminder that planning can serve people’s intrinsic needs far better than market solutions.

While the US system of private providers ostensibly offers consumers greater choice, exercising choice over one’s medical provider is actually a “fairly low priority” – participants in a recent health survey prioritised “fairness” over “choice”. The appeal of the latter diminishes further as health conditions become more life-threatening. Market competition and consumer choice may work when deciding on a variety of cereal, but cancer patients would rather defer to doctoral expertise than be offered an array of different treatments for their condition.

Yet the NHS also tells the story of market failure, as the post-war consensus about state planning was replaced by a political belief in the efficacy of free markets. In 1990, John Major extended an invention of Margaret Thatcher’s government: the internal market. This originated as a plan to decentralise decision-making and introduce greater competition across the health service, in accordance with the ideas of Public Choice Theory first pioneered by the right-wing economist James Buchanan.

The rationale was that money would follow patients to the best hospitals, creating greater competition between health providers. Subsequent reforms introduced incentives and ratings systems across the NHS, again intended to bolster competition and consumer choice. But these had perverse effects – including cardiac surgeons less willing to perform risky yet life-saving operations. The internal market now costs an estimated £4.5bn to administer each year. If this proves anything, it’s that consumer logic can’t simply be extended to patient care. The market can only imagine people as sovereign consumers – yet we can also be politically active citizens, care-givers, cancer patients, and more.

Governments often believe that private firms, battle-hardened by sink-or-swim competition, bring increased efficiency to the public sector. They imagine the market as a perfectly competitive sphere. Yet without the state, many markets wouldn’t exist. Government funding has bolstered Silicon Valley, paved the way to the iPhone and pioneered space travel. Too many politicians have lost faith in the capacity of the state to manage or innovate. Philips and Rozworski’s book is a timely exhortation to rethink the wisdom that markets always do it better.

Content from our partners
Peatlands are nature's unsung climate warriors
How the apprenticeship levy helps small businesses to transform their workforce
How to reform the apprenticeship levy